Business Watch: iPad’s rivals still struggling to make inroads

The iPad 2 knocks spots off the competition, according to analysts who all seem to be gushing in awe at Apple’s new tablet

The device was unveiled by Apple founder Steve Jobs, who made a surprise appearance despite reports that the technology legend’s health is failing.

In the shops in the UK from March 25, the iPad 2 is a third thinner and 91g lighter than its predecessor, which itself is only about a year old.

Other new features are front- and rear-facing cameras, a faster processor, and the fact that it also comes in white as well as black.

Most importantly, perhaps, it will cost the same as the first iPad.

CCS Insight wrote that the “iPad 2 underlines Apple’s dominance of the tablet category”.

Oppenheimer’s Yair Reiner told clients that while the iPad 2 doesn’t include any new breakthrough features he still expects Apple to take between 75 and 85 per cent of the tablet market in 2011.
“This is a sad day for the crowd of competitors still struggling to home in on the first iPad’s price and performance,” he wrote.

The iPad, which has effectively created a whole new product category, has spawned a flurry of copy-cat devices from hardware makers and mobile phone manufacturers.

But rival stockbroker Jefferies & Co said: “Despite the launches of many competitive tablets, we believe Apple’s product leadership, vertical integration, and vast scale will cause it to win the largest shares of the tablet market and the majority of the economic benefits.”

Analysts at Gartner are even cutting their forecasts for worldwide sales of personal computers, saying that consumers are increasingly choosing the convenience of tablets instead.

Apple investors meanwhile were somewhat reassured to see a public appearance from Jobs, whose health remains the source of much speculation, which rarely fails to move the Apple share price.

Among the first UK carriers of the iPad 2 in the UK will be Everything Everywhere – the company that owns the combined T-Mobile and Orange networks.

In a release, the networks declared: “Everything Everywhere (Orange and T-Mobile) will be selling the iPad 2 in the UK once it’s made available later this month! Hurrah!”

But perhaps it’s early for Everything Everywhere to be celebrating, if its latest results are anything to go by. I didn’t have space to cover them properly in the last column and they merit further examination.

Challenges everywhere
When the merger happened in April of last year, it was sold as the creation of a “national champion”.

But there is a huge amount of work still be done before the company can claim such a title.

Everything Everywhere reported a 1.3 per cent rise in service revenue in the three months to December 31.

In contrast, Vodafone’s UK business reported underlying revenue growth of seven per cent for the same quarter and O2 UK, a 5.6 per cent increase.

And Everything Everywhere’s profits went backwards: earnings before interest, tax, depreciation and amortisation in the nine months to December 31 fell from £1.17 billion to £1.02 billion.

In the company’s defence, it had heavier restructuring charges in that period, as it continued to cut costs and jobs.

But there was no escaping the fact that the company’s EBITDA margin – the closely watched measure of a mobile network’s profitability – fell from 21.6 per cent to 19.3 per cent.

Some analysts described the fall in margin – which compares with margins of 25.4 per cent at O2 UK and 23.1 per cent at Vodafone – as “alarming”.

Nevertheless, Tom Alexander, Everything Everywhere’s chief executive, said he was confident that the business would reach its target EBITDA margin of 25 per cent or more by 2014.

“While everybody else is trying to squeeze the pips out of their organisations, we are reaping the benefits of economies of scale, efficiencies and driving forward that margin progression,” he said.

The margin squeeze was caused in part by the group’s push to win more contract customers, which involves giving away fancy phones for free. Thus subscriber acquisition costs rose sharply.

The positive was that the business added 300,000 new contract customers in the last three months of 2010, to take contract adds over the nine months to 752,000.

But it has now lost one million prepay customers since its formation in April of last year.

It lost 187,000 prepay punters in the Christmas quarter alone, but says it’s part of a strategy to focus on profitable contract customers, from whom revenues are more stable, reliable and higher.

The good news is the company says it’s on track to achieve its cost savings target of £3.5 billion.

Its owners France Telecom and Deutsche Telekom also reaped a £646 million dividend.

Often businesses will go through a period of pain and disruption after a merger, so it’s little surprise that Everything Everywhere is reporting weak figures right now.

The question is whether Alexander can keep spirits up and hit that ambitious margin target, along with his aim to achieve double-digit growth in cash flows between 2010 and 2014.

Spectrum portent
Finally, a spectrum auction in Hong Kong last week could give a small clue as to the sorts of levels UK operators might be tempted to pay when 4G spectrum is auctioned off here.

The two winners spent two-and-a-half times the amount paid for 3G spectrum a decade earlier.

Hutchison, which owns Three in the UK, and SmartTone-Vodafone, paid £134 million for 15-year licences to operate 20MHz of radio spectrum in the 850MHz and 900MHz bands respectively. The spectrum could be used for super-fast fourth-generation (4G) services.

The auction result prompted an extraordinary attack from the market leader CSL New World, which accused its rivals of paying “stratospheric” and “value-destructive” prices.

Perhaps it was just sour grapes, and no-one expects the UK auction of 4G spectrum to fetch anything like the £22.5 billion raised here in the dotcom boom, but it just proves that anything can happen in an auction.